Sorting out the Subsidies

1. Please tell us a bit about Policy Integrity. Who are you and what are your goals?

Policy Integrity is a non-partisan advocacy organization and think-tank based at New York University School of Law dedicated to improving the quality of governmental decisionmaking. We use economics and administrative law to show that strong environmental and public health protections are often cost-benefit justified. By building coalitions with non-governmental organizations, Policy Integrity facilitates effective participation in the regulatory process. Policy Integrity is also dedicated to contributing original scholarly research in the areas of environmental, public health, and safety policy.

2. You’ve created a wiki to catalog sections of the tax code that benefit various energy sectors. What is it, how does it work and how will it help us achieve better use of energy resources?

The wiki works much in the same way Wikipedia does. Using crowdsourcing, the site will gather the expertise of tax experts, lawyers, economists, and concerned citizens to identify specific sections of the tax code that benefit energy producers. Contributors will be able to input those sections into the site.

A better understanding of the ways in which our tax code grants free benefits to energy companies is the first step to evaluating how our tax policy affects the energy landscape and how to most efficiently and effectively allocate our resources.

A substantial portion of the tax breaks go to fossil fuel companies. These groups have been supported by taxpayer largess for nearly a century. At one point, these were struggling industries just getting their feet under them. But now they are well established and are some of the most profitable in the nations.

4. To what extent are these subsidies problematic?

The subsidies can be problematic for several reasons. First, is the issue of lost tax revenues which contributes to the national deficit and ends up contributing to higher tax bills for everyone else.

Subsidies for fossil fuel industries also discourages investments in renewable projects and cleaner forms of energy. Maintaining these tax breaks sends the wrong signals to investors, creating an energy landscape where it doesn’t make sense to put money into alternative energy investments. As a result, promising clean energy projects gather dust on the shelves.

5. Do you think any energy sector can thrive without subsidies?

In an ideal world, energy production would not be subsidized and different technologies would compete on value and merit alone. And certainly the energy sector can survive without tax breaks if the playing field is even.

But we also have to remember that on top of the tax breaks they receive, fossil fuel and other polluting industries already receive a built-in bonus: They don’t have to pay the full cost of externalized public health risks and environmental damage that they create. Instead the public picks up the bill in the form of health problems, loss of natural resources, and climate change risks.

If any energy sector is to be subsidized, it makes economic sense to account for this disparity by subsidizing the development of renewable sectors who are not benefiting from this de facto giveaway.

6. Does the rest of the world subsidize energy to the same extent as the US does?

The Guardian recently found that in 2010, gas, oil and coal received about 3.63 billion pounds in subsidies in the U.K. versus all renewables, which received 0.7 billion. There are also subsidies in many energy producing developing countries where the state heavily supports consumer purchases of fossil fuels. The recent repeal of petrol subsidies in Nigeria prompted company strikes and massive protests, illustrating the political difficulties of such a move.

Economic woes in Europe have started to take a toll on countries that have traditionally been strong advocates for cleaner energy, including Spain, which recently froze renewable subsidies to address its deficit, and Germany, which plans on cutting solar subsidies by a third within a year.

7. Can you estimate what the cost of energy would be to the consumer without subsidies and tax breaks?

This is very hard to do, in part because the full extent of the subsidies are not known. By one estimate, the total tax subsidies for oil in the United States were $72 billion from 2002 to 2008. But consumers spent $481 billion on gasoline purchases in 2011 alone. So proportionally, it becomes clear that cutting these subsidies is unlikely to have a major effect at the pump.

8. The president has targeted some of these fossil fuel tax breaks—if it could ever pass, what effect would that have on the energy industry?

Repealing fossil fuel tax breaks would be an important step in providing a more level playing field for renewable energy by addressing market distortions.

Fossil fuel industries don’t pay the full costs of selling energy. A lot of these costs are externalized on the public in the form of hospital bills, sick days and premature deaths. Ideally a price on pollution would be the best way to balance these kinds of market distortions. But until that happens, shifting subsidies away from dirty energy sources will help reduce investment distortions between technologies that pollute and those that don’t.

9. Why take on this project? What do you hope to find?

When we initially looked at subsidies to fossil fuel industries, it became clear that few have a good grasp of their magnitude. It’s not a transparent figure because the IRS doesn’t publish data on how much these companies receive in breaks, and published estimates ranged widely. That’s partially because our tax code is extremely complex and vast, making it easy for these subsidies to be hidden from view.

The goal is to build a foundation for evaluating our federal tax policies regarding the energy sector. We need to start by understanding how much of American taxpayers’ dollars goes to these different industries.

Michael A. Livermore

Executive Director

Michael A. Livermore is the executive director of the Institute for Policy Integrity and an adjunct professor at NYU Law. He is the author, along with Richard L. Revesz, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health (Oxford University Press, 2008). He is a frequent panelist at U.S. and international conferences on cost-benefit analysis and his views and commentary have appeared in BusinessWeek, Forbes, The Wall Street Journal, The Washington Post, The New Republic, and Time. Livermore was a postdoctoral fellow at NYU’s Law Center for Environmental and Land Use Law and served as a judicial clerk for the Honorable Harry T. Edwards at the U.S. Court of Appeals for the D.C. Circuit. Between 1995 and 2002, Livermore worked for the New York Public Interest Research Group (NYPIRG) where he was a leading voice of the state’s environmental community. Livermore graduated magna cum laude from New York University School of Law, where he was a managing editor of the NYU Law Review. He has published legal scholarship on topics including cost-benefit analysis in the global context, regulatory ossification, water pollution control, judicial decisionmaking, and international food safety standards.

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